The Germans will enter some sort of banking union compromise after elections. This agreement will include two concessions that will render the new regulator a paper tiger. First, the Germans do not want their politically-connected, unhealthy sparkassen to be supervised by Brussels leaving only a few larger banks to the vagaries of Brussels supervision. Second, Germany and the rich countries will not pay the necessary sums to establish resolution authority and deposit insurance, so they will utilize the ESM for this task.
Nothing has changed here. The purpose of the banking union is to recreate one lending market throughout the Eurozone, but that will not be the result of the agreement currently taking shape. The rich countries are not sharing their financial muscle with the periphery, and as long as this is the case depositors will rightly believe that a euro in Finland, Austria, the Netherlands and Germany is safe than a euro in Italy and move their money accordingly.
From Friday’s Edition:
Even though employment continues to plummet throughout the Eurozone, the mainstream media cannot help itself and must always present a positive side to the story:
There were encouraging developments in the three countries that have long been at the forefront of the euro zone’s fiscal and banking crisis, and which have received bailouts form the currency area and the International Monetary Fund. Employment rose 0.8% in Portugal, 0.5% in Ireland and 0.1% in Greece, suggesting the three may be on the mend.
The first part of the quote is accurate, but the writer jumps to conclusions in the bold type. When the rise in employment in these countries is placed into context, the “analysis” just does not hold up:
During the long, inexorable march downward, both Greece and Portugal have registered months where employment picked up. You can see for yourself what happened next by looking directly to the right of the those months conveniently circled in red for your perusing pleasure. Each rise was merely a temporary blip on the road to economic ruin.
Ireland is different. The situation has changed and employment has stopped falling, but it is not really growing either:
My interpretation of the data is neither growth or contraction but stagnation. Ireland has barely recovered to 2005 employment levels, and at this pace of growth it will take over a decade for it to do so. Sorry, but there is no good news in this data.
From Thursday’s Edition:
There is no banking union but merely some bureaucratic busywork to create the perception that the EU is attempting to solve the eurocrisis. Last winter, we posted the six essential ingredients for a banking union, Cosmetic, Can-Kicking Banking Union Agreement in Play . Let’s check the EU’s progress on each of the points:
- A joint depository insurance scheme. Germany and the rich countries will not become joint and severally liable for the periphery’s zombie banks under any circumstances. As long as depository insurance is different among the countries, depositors will continue to shun PIIGs banks. For live examples of the consequences of this policy, please see Cyprus.
- Mandatory participation by all banks. Only 150 large, systematically important banks will be supervised by the ECB. The remaining 6,000 will be continue being supervised by their host countries where they will be coddled and allowed to survive even if they become unhealthy, due to political pressure.
- A set of rules applicable to all the banks. If there is anything that bureaucrats love to do, it is writing rules. I am fairly confident that the ECB will promulgate a set of regulations that may not necessarily be enforced due to political pressure.
- An implementation schedule. The banking union has been pushed back from early 2013, to the summer of 2013, to early 2014 and finally September, 2014. I see one more delay making early 2015 a more plausible roll-out date.
- A way to legally allow countries outside the eurozone to participate in an ECB-led banking union. This has yet to be achieved.
- A plan to deal with banks that are already in trouble or have been bailed out; i.e. resolution authority. Again, the rich countries are not even remotely inclined to become joint and severally liable for the PIIGs banks; therefore, the Eurozone will continue to have several different banking systems dependent on the fiscal and economic health of the host country.
In conclusion, the Eurozone has achieved two of the six perquisites for a banking union, which means that you may have another can kick here, but you don’t have a true banking union.
From Wednesday’s Edition:
Two of the recurrent themes of this blog are that cheap money benefits the rich to the detriment of the rest of us and that there are diminishing marginal returns with each successive iteration of monetary easing . The table above succinctly supports each case.
Observe how the 1% grabs an increasing share of income as monetary easing becomes more drastic. During the Clinton boom, the Fed maintained a tight policy until 1998 when it loosened in response to the Long Term Capital Management crisis and trouble with the Asian Tigers. The Bush Boom was created by a very low interest rates in the wake of the bursting stock market bubble and 9/11, while the current “recovery” is a child of not just low interest rates, but zero bound rates plus trillions in money printing to purchase Federal debt and mortgage bonds from TBTF banks, hedge funds and rich investors.
The mostly organic Clinton boom logged the best numbers for both the 99% and 1% racking up an overall 31.6% income increase with 45% of the gains accruing to the rich. During the Bush boom fed by cheaper money, the overall income increase is a mere 16.1% with the rich capturing 65% of the gains. The current economic “recovery” is being fueled by the cheapest money: not only has the Fed reduced the operating costs of the TBTF banks with ZIRP but it is also bailing them out of their poor investments by purchasing mortgage bonds driving up the price markedly since 2009. Income has only recovered about 6% with the rich taking home 95% of that gain.
Note the pattern: each successive expansion is about half as strong as its predecessor, income growth of 31.6% declining to 16.1% and then to 6.0%. Moreover, each wave of monetary easing results in a higher percentage of income gains benefiting the 1%, increasing about 50% from expansion to expansion, 45% to 65% to 95%.
Intriguingly, even though the rich are receiving most of the gains today, everyone is worse off due to excessive liquidity with income gains decreasing across-the-board.
From Tuesday’s Edition:
The number of job openings fluctuates, so one bad month should not be a cause for concern. What is troubling is that job openings, after surging from late 2009 into early 2012, have leveled off since then as indicated by the arrow. Since 2012, the number has ranged between 3.6-3.9 million, which is way below the historical numbers of a smaller U.S.
The lack of labor demand leads inevitably to stagnant wages suppressing economic growth indefinitely. Consumer spending accounts for 70% of the U.S. economy. If this component stagnates, it is impossible for the other 30% to fill this hole. The New Normal endures.
From Monday’s Edition:
This article is essentially cheerleading for Japan. Here’s the lede:
Japan’s economy expanded much faster than initially expected in the second quarter, adding to growing signs of a solid recovery taking hold. (My emphasis)
Note how the recovery narrative thwarts any chance of real reporting. The revised GDP figure is presented without context and assumed to be within a group of “growing signs” pointing to recovery. There are also growing signs that this burst of economic activity is not indicative of a growth trend, but merely a continuation of Japan’s stagnation.
Inflation, fed by soaring energy costs, is reducing consumers’ purchasing power and crushing retail sales with a 1.8% plunge last month:
GDP growth was not that special, anyway. Japan has exceeded or equaled 0.9% in exactly 10 out of 24 quarters without a revival in Japan’s postwar growth miracle. Just like the U.S, Japan’s economic picture remains mixed. Those closest to the Bank of Japan’s easy money will do well, while regular people will remain recovery free.